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Cite as: [2008] 2 All ER 863, [2008] UKHL 23, [2008] 16 EG 152, [2008] STC 1225, [2008] NPC 45, [2008] 1 WLR 888, [2008] WLR 888, [2008] BTC 5330, [2008] BVC 452, [2008] STI 1231

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Judgments - Principal and Fellows of Newnham College in the University of Cambridge (Respondents) v Her Majesty's Revenue and Customs (Appellants)

HOUSE OF LORDS

SESSION 2007-08

[2008] UKHL 23

on appeal from: [2006] EWCA Civ 285

OPINIONS

OF THE LORDS OF APPEAL

FOR JUDGMENT IN THE CAUSE

Principal and Fellows of Newnham College in the University of Cambridge (Respondents) v Her Majesty's Revenue and Customs (Appellants)

Appellate Committee

Lord Hoffmann

Lord Hope of Craighead

Lord Walker of Gestingthorpe

Lord Mance

Lord Neuberger of Abbotsbury

Counsel

Appellants:

Nigel Pleming QC

Philippa Whipple

(Instructed by Her Majesty's Revenue & Customs )

Respondents:

David Milne QC

Andrew Hitchmough

(Instructed by Mills & Reeve LLP)

Hearing dates:

3-4 MARCH 2008

ON

WEDNESDAY 16 APRIL 2008

HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

Principal and Fellows of Newnham College in the University of Cambridge (respondents) v Her majesty's Revenue and Customs (Appellants)

[2008] UKHL 23

LORD HOFFMANN

My Lords,

In 2000, Newnham College decided to build a new library at a cost of about £7.5m. As an educational institution, Newnham makes exempt supplies for the purpose of VAT. Making exempt supplies is all very well for the recipients, because they pay no VAT. It is less attractive if you are the supplier, because you are not credited with the input tax on the goods and services on which you have been charged VAT. For a famously poor women's college, the VAT on the cost of the library was a large sum of money.

The college therefore took advice on a scheme which would enable it to recover the VAT. The first step was to acquire a shelf company and call it Newnham College Library Company Ltd ("the company"). The college held all the shares and members of the college formed the board of directors. On the completion of the new library, the college leased it to the company for a term of 11 years at a reviewable rent of £165,000 a year. That in itself would have done the college no good, because a lease of land is also an exempt supply. However, the Sixth Directive, which requires member states to exempt leases, also gives them an option to allow taxpayers a "right of option for taxation": article 13C(a). The United Kingdom has availed itself of this option in paragraph 2 of Schedule 10 to the Value Added Tax Act 1994:

"Subject to sub-paragraph.…[(3AA)]…below, where an election under this paragraph has effect in relation to any land, if and to the extent that any grant made in relation to it at a time when the election has effect by the person who made the election…would (apart from this sub-paragraph) fall within Group 1 of Schedule 9, the grant shall not fall within that Group."

The college gave notice of election under this paragraph. The intention was that the lease to the company would thereby become a taxable supply and the college would be entitled to recover all the input tax attributable to making that supply, namely, the VAT on the cost of building the library.

This was the essence of the scheme, but it was complicated by the need to achieve two potentially conflicting objectives. The first was that notwithstanding the lease which granted exclusive possession of the library to the company, the senior and junior members of Newnham had to be able to go on using it in much the same way as before. The second was that the arrangements should not fall foul of various anti-avoidance provisions which had been introduced into Schedule 10 to counteract certain schemes of this kind.

The relevant provisions were inserted into Schedule 10 by section 37 of the Finance Act 1997:

"2 … (3AA) Where an election has been made under this paragraph in relation to any land, a supply shall not be taken by virtue of that election to be a taxable supply if—

(a) the grant giving rise to the supply was made by a person ('the grantor') who was a developer of the land; and

(b) at the time of the grant, it was the intention or expectation of… the grantor…that the land would become exempt land (whether immediately or eventually and whether or not by virtue of the grant) or, as the case may be, would continue, for a period at least, to be such land….

"3A …

(7) For the purposes of paragraph 2(3AA) above and this paragraph land is exempt land if, at [the relevant] time … —

(a) the grantor…or

( c) a person connected with the grantor…

is in occupation of the land without being in occupation of it wholly or mainly for eligible purposes.

(8) For the purposes of this paragraph…a person's occupation at any time of any land is not capable of being occupation for eligible purposes unless he is a taxable person at that time.

(9) …a taxable person in occupation of any land shall be taken for the purposes of this paragraph to be in occupation of that land for eligible purposes to the extent only that his occupation of that land is for the purpose of making supplies which—

(a) are or are to be made in the course or furtherance of a business carried on by him; and

(b) are supplies of such a description that any input tax of his which was wholly attributable to those supplies would be input tax for which he would be entitled to a credit.…

(13) For the purposes of this paragraph a person shall be taken to be in occupation of any land whether he occupies it alone or together with one or more other persons and whether he occupies all of that land or only part of it."

These are very detailed provisions but the issue to which they give rise in this case is relatively straightforward. The college, as grantor of the lease, was the developer of the land. If, since the grant of the lease, it has been "in occupation" of the library within the meaning of paragraph 3A(7), the library is "exempt land" as defined in that paragraph and the grant of the lease is not a taxable supply. So the question is whether the college is "in occupation" of the library, either alone or together with the company.

It is important to emphasise the narrow scope of the issue before the House. At no stage has it been argued by the Commissioners that the company is "a person connected with the grantor" within the meaning of paragraph 3A(7) and that the company's occupation for ineligible purposes makes the library exempt land. Nor have the Commissioners attempted to rely upon any general overarching anti-avoidance principle. In Halifax plc v Customs and Excise Commissioners (Case C-255/02) [2006] STC 919 the European Court of Justice, in three cases bearing some resemblance to this one, propounded a general anti-avoidance principle based upon the civilian doctrine of "abuse of rights":

"69 The application of Community legislation cannot be extended to cover abusive practices by economic operators, that is to say transactions carried out not in the context of normal commercial operations, but solely for the purpose of wrongfully obtaining advantages provided for by Community law…

70 That principle of prohibiting abusive practices also applies to the sphere of VAT…

74 [But] it would appear that, in the sphere of VAT, an abusive practice can be found to exist only if, first, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions.

75 Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage…

76 It is for the national court to verify in accordance with the rules of evidence of national law, provided that the effectiveness of Community law is not undermined, whether action constituting such an abusive practice has taken place in the case before it …"

This judgment was delivered on 21 February 2006, a week after this case had been argued in the Court of Appeal. But, as Chadwick LJ noted in his judgment delivered on 24 March 2006, the Commissioners expressly disclaimed reliance upon this principle and they have maintained this position before your Lordships. They say that they wish to test the efficacy of the existing anti-avoidance provisions. I therefore do not invite your Lordships to speculate on whether the Halifax principle would have applied.

The question, therefore is whether the college is in occupation of the library. For this purpose one must, I think, begin by considering what the statute means by "occupation". It has often been remarked that this is a word which can mean different things in different contexts: see, for example, Viscount Cave in Madrassa Anjuman Islamia v Johannesburg Municipal Council [1922] 1 AC 500, 504 ("a word of uncertain meaning") and Lord Mustill in Southern Water Authority v Nature Conservancy Council [1992] 1 WLR 775, 781. I start, therefore, with the context in which the word is used.

Paragraph 2 of Schedule 10 operates as an exception to the general provision in Group 1, paragraph 1 of Schedule 9 which provides that "the grant of any interest in or right over land or of any licence to occupy land" shall be an exempt supply. The election under paragraph 2(1) of Schedule 10 has effect only if the grant would otherwise have fallen within paragraph 1 of Group 1. This context suggests that a "licence to occupy" in Schedule 9 and "occupation" in Schedule 10 refer to the same concept.

On the question of what amounts to a licence to occupy within Schedule 9, we have the recent guidance of the Court of Justice in Sinclair Collis Ltd v Customs and Excise Commissioners (Case C-275/01) [2003] STC 898. The question in this case was whether the grant of a right to maintain a cigarette vending machine in a public house was a "letting of immovable property" within article 13B (b) of the Sixth Directive. This concept had been transposed in Schedule 9 to include a "licence to occupy land". The Court of Justice decided that it was not. It stated the principle at pp. 909-910, para 25:

"The fundamental characteristic of a letting of immoveable property for the purposes of article 13B(b) of the Sixth Directive lies in conferring on the person concerned, for an agreed period and for payment, the right to occupy property as if that person were the owner and to exclude any other person from enjoyment of such a right."

In formulating the test in this way, the Court was echoing the opinions expressed by Lord Nicholls of Birkenhead, Lord Millett and Lord Scott of Foscote when the case was before the House of Lords: see [2001] UKHL 30; [2001] STC 989. Lord Nicholls said (at p. 998, para 35) that the licence was "more naturally to be regarded as a licence to use land rather than a licence to occupy land." Lord Scott (at p. 1006, para 77) gave the example of a right to use a safe deposit box in a bank. The bank remained in occupation of the whole of its premises, including the space taken up by the box.

"The customer has no more than a right to put things in the box and is not, in any meaningful sense, in occupation of the space taken up by the box."

The same distinction between occupying land and merely using it had previously been made by Advocate General Jacobs in Swedish State v Stockholm Lindöpark AB (Case C-150/99) [2001] STC 103. Lindöpark owned golf courses and provided golfing facilities for the staff and clients of companies who joined and paid a fee. The question was whether this was a letting of the golf course within the meaning of article 13B (b). The Advocate General thought it was not:

"34. …Where … an individual pays an entrance fee to gain transient access, amongst other individuals, to a public swimming pool, it would be stretching the concept beyond any reasonable limit to regard such a transaction as leasing or letting.

35. …If a person or entity were to pay for the exclusive use of a course for a specified period - say, in order to organise a tournament or championship - with a concomitant right to charge entrance fees for players and/or spectators, that would appear to partake fairly clearly of the nature of a lease or let. The same would not apply, however, to the casual golfer or group of golfers coming to play a round…A golfer may be thought of not as occupying the course in any sense but as traversing it."

The Court agreed. More recently, in Belgian State v Temco Europe SA (Case C- 284/03) [2005] STC 1451, 1469 it summed up these cases (in para 20) by saying that it was necessary to distinguish the "relatively passive" activity of letting immoveable property from transactions which—

"have as their subject matter something which is best understood as the provision of a service rather than simply the making available of property…"

The Commissioners say that these cases on the meaning of "occupy" for the purposes of Schedule 9 have no application to the meaning of "occupation" in paragraph 3A(7) of Schedule 10. The latter is an anti-avoidance provision which should be given a wide meaning. The policy of the 1997 amendments was that exempt suppliers should not be able to create a taxable supply of the land by the grant of a lease and still use it for the purposes of making exempt supplies. "Occupation" should therefore be interpreted to mean any physical presence on the land by which the grantor continues to use it.

I do not agree. In choosing the concept of occupation, Parliament must have been aware that it came with a well-understood meaning. The Commissioners say that it was only after 1997 that the concept was clarified in cases like Lindöpark and Sinclair Collis. But I do not think that there was ever a time when a mere physical presence on land for the purpose of making use of it, like playing a round of golf, would have been regarded as occupation. Furthermore, other parts of Schedule 10 show the Parliament was well aware that "occupation" of land and "use" of land are different concepts. For example, in paragraph 5(5), (which was in the original 1994 Act), the definition of a developer of a building or work includes a person who constructs it—

"with a view to granting an interest in, right over or licence to occupy it (or any part of it) or to occupying or using it (or any part of it) for his own purposes."

The question is therefore whether the college has, as the Court of Justice said in Sinclair Collis, "the right to occupy property as if that person were the owner and to exclude any other person from enjoyment of such a right." For this purpose it is necessary to examine the arrangements under which its members are able to use the library. This appears from the lease, four agreements made between the college and the company on 2 July 2001 and the unchallenged evidence of the college Bursar, Mr du Quesnay, who is also a director of the company.

The lease gives the company exclusive possession of the library, the sole right to occupy the library and exclude others. That of course is not enough to answer the statutory question. One must also ask whether the company actually exercises this sole right or whether, by agreement or de facto, it allows occupation, or joint occupation, by the college. For this purpose it is necessary to examine the agreements and see whether the rights which they confer upon the college are rights of occupation or merely rights to use the services and facilities provided by the library and its staff. One must also ascertain what is actually done in relation to the premises and ask whether the acts which can be attributed to the college are acts of occupation or merely use of the library facilities, referable to the rights granted by the agreements.

The first agreement is a sale by the college to the company of all the books, fixtures, fittings and equipment in the library. The second is called "agreement for the hire of library books", although the subject matter of the agreement is rather more extensive. The company agrees in return for a fee to provide the college with "the services" listed in a schedule. These include the provision of books on hire to the college for the use of senior and junior members, "the provision of appropriate arrangements for the filing, maintenance and archiving of the books" and "such incidental services as are necessary for the provision of an effective library service."

The way this works in practice is that the library staff look after the books. They catalogue and maintain them so as to be available to members of the college. There are some tables and chairs at which senior or junior members may consult reference books and some students may like to work in the ambience of the library, but for the most part, fellows and undergraduates borrow the books and work in their own rooms. Members of the college have access to the building by means of electronic cards but the librarian may disable the cards of those whom she excludes for breaking the rules. Disciplinary powers are exercised by the librarian in her own discretion after consultation with the college. On week-days during normal business hours the library is open and members of the public may enter and ask the permission of library staff to use it. The admission of non-members of the college is a matter for the discretion of the librarian.

The third relevant agreement is for the secondment of staff. The college agrees to second to the company certain employees to work for the company as librarian and assistants and so enable the company to perform its obligations to the college. The terms of secondment are contained in a specimen letter to the employee scheduled to the agreement. It provides that during secondment the employee will act in the specified capacity (librarian, assistant librarian, etc) for the company and be responsible for the provision of services to members of the college. The employees remain employed by the college, are paid by the college and can be dismissed only by the college, but they perform services for the company.

Finally, there is an administration agreement under which the college agrees to provide certain administrative services for the company.

Despite the close links between the college and the company, the Commissioners do not suggest that the separate personality of the company should be ignored or that the agreements should not be taken at face value. On that basis, it seems to me clear that the college is entitled to the provision of services for its members but cannot be said to be in occupation of the library. There is nothing in the arrangements, whether in law or in practice, which contradicts or displaces the right of exclusive occupation granted to the company by the lease. The practical physical control of the library premises is in the hands of the librarian and her staff, who act on behalf of the company. It is they who have the right to admit or exclude persons from the library and they do not share this right with the college. The college is contractually entitled to have its members in good standing admitted and provided with books and other services, but these rights cannot be characterised as rights of occupation any more than the rights of the Swedish golfers or their companies to the use of the course. The services provided by the company to the college are by no means "relatively passive": acquiring and cataloguing the books, maintaining them upon the shelves and assisting the users are activities which require the full time services of the librarian, her two assistants and a graduate trainee. In my opinion it is impossible to say that the college either had in law or exercised in practice "the right to occupy [the] property as if [it] were the owner and to exclude any other person from enjoyment of such a right". The essence of the right conferred on the college is the right to the use of the books. The right to enter on the premises for the purpose of taking them out or consulting them is only ancillary to this primary right.

The Tribunal, which took a contrary view, appears to have been considerably influenced by the fact that the arrangements were plainly and confessedly a scheme of tax avoidance. They said the scheme was "devised, scripted and performed" with the purpose of avoiding VAT, the people who "ran" the college and the company were "the same people with different hats" and that allowing the scheme to succeed would be "an abuse of the legislation and go against its spirit and intendment". All this would have been very relevant if the Commissioners had been claiming that the scheme should be disregarded as an abusive practice. Indeed, the language of the Tribunal reads remarkably like a statement avant la lettre of the Halifax doctrine. But it has little relevance to the question of whether, taking the arrangements at face value, it could be said that the college was in occupation of the library premises.

In the end it seemed to me that the argument for the Commissioners, despite their disclaimer of Halifax doctrine, could be sustained only on that basis. They relied, for example, on the fact that the library is run by the college's own staff ("albeit on secondment") over whom the college exercises "ultimate control", presumably in the sense that they can dismiss them. But the only question is whether the acts of the staff which are alleged to constitute acts of occupation are attributable to the college. For that purpose they must be performed on behalf of the college. But the effect of the secondment is quite clearly that they are performed on behalf of the company. Once one reaches that conclusion, the arrangements for employment of the staff have no further relevance. The question of "ultimate control" and the general look-and-feel of the arrangements are material only to establishing the admittedly tax avoiding nature of the scheme.

The Commissioners relied upon an earlier decision of the Tribunal in Brambletye School Trust Ltd v Commissioners of Customs and Excise (2002) VAT Decision 17688. This concerned a somewhat similar scheme used in connection with the construction of a new sports hall for a preparatory school. The Tribunal found that the school was in occupation of the hall because whenever the children used the hall, they were under the supervision of teachers employed by the school. It was the teachers who exercised control over the premises.

In my opinion a decision as to whether acts attributable to a body like the school or college amount to occupation of premises is a question of degree, sensitive to the particular constellation of facts. An appellate court must pay considerable respect to the opinion of the fact-finding body: compare Designers Guild Ltd v Russell Williams (Textiles) Ltd [2000] 1 WLR 2416. I would therefore not question the decision of the Tribunal in the Brambletye case. In this case, the Tribunal did not really consider whether the facts amounted to occupation by the college rather than (or in addition to) occupation by the company because they simply lumped the two bodies together. The Court of Appeal, however, did consider this question and came to the conclusion that occupation by the college had not been established. I would not have disturbed this judgment, even if I had been inclined myself to take a different view. In fact, however, I am on complete agreement with the judgment of Chadwick LJ, whose reasoning is largely reflected in this opinion. I would therefore dismiss the appeal.

LORD HOPE OF CRAIGHEAD

My Lords,

I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann. I agree with it, and for the reasons he gives I too would dismiss the appeal.

The question is whether the college remained in "occupation" of the library for the purposes of para 3A (7) of Schedule 10 to the Value Added Tax Act 1994 after granting the lease to the company. If it did, the land is exempt land for the purposes of para 2 (3AA) and the grant of the lease is not to be taken as a taxable supply notwithstanding the college's election under para 2(1) of the Schedule that its grant of the land to the company was to be a taxable supply. As Lord Hoffmann has explained, the Commissioners have not argued that the transaction was a sham or that the college was abusing the legislative provisions which allow taxpayers who make exempt supplies to opt for taxation in relation to any land. The Commissioners do not seek to uphold the reasoning of the tribunal in so far as it may have been influenced by the fact the college was plainly seeking to avoid tax. Their case is that the exemption was designed to prevent tax avoidance, that it must be strictly construed, and that the disqualification from the exemption which it creates applies here. The scheme that was entered into, which was specific to the use by an academic institution of land for academic purposes, failed to satisfy the conditions of the exemption.

Although the legislative provisions are rather complicated, the issue in the end turns on the meaning that is to be given in this context to the words "in occupation of the land" in para 3A (7). Mr Pleming QC for the Commissioners submitted that they meant that a grantor who was intended or expected at the time of the grant to be physically present on the land was to be taken to be in occupation of it. This reading of the words gave effect to the central policy objective of the VAT system that persons making exempt supplies should not recover VAT incurred by them in the course of their businesses. The college was in occupation of the land by means of the physical presence in the library of its fellows, students, staff and other persons authorised by the college to be there. This was part of the package of the exempt services that were provided to them by the college. The fact that they were there in the enjoyment of those services was sufficient. It would be wrong in this context to confine the concept of occupation to the meaning that would be given to it in other contexts, such in the phrase "licence to occupy" as used in item 1 of Group 1 in Schedule 9 to describe exempt supplies in relation to land.

I do not think that there is much doubt about what the word "occupation" means, although it may be more difficult to apply its ordinary meaning to the facts in some contexts than it is in others. In its ordinary meaning it requires more than just a right to use the land or to enjoy the facilities that are to be found there. Physical presence is an essential element. But there is more to it than that. It requires actual possession of the land, and the possession must have some degree of permanence. In the Court of Appeal [2006] STC 1010, para 36, Chadwick LJ drew on the guidance that the House derived from decisions of the European Court of Justice about the meaning to be given to the concept in the context of the Sixth Directive in Customs and Excise Commissioners v Sinclair Collis Ltd [2001] STC 989. He said that to be in "occupation" of land for the purposes of para 3A(7) requires more than a right to use that land. He then added this important sentence:

"It requires some degree of control over the user by others - that is to say, some degree of control over what those who are not also in occupation of the land can do on the land."

The sentence which I have quoted directs attention to what I would regard as the central issue in this case. The question is not whether the college is in control of the company. It is whether the college is to any degree in control of the use of the land. This is not an insignificant test. Para 3A(13) of Schedule 10 provides that, for the purposes of the paragraph, a person is to be taken to be in occupation of any land whether he occupies it alone or together with one or more other persons and whether he occupies all of that land or only part of it. Its effect is to remove the requirement of exclusive occupation which is usually inherent in a grant of an interest in or a right over land or a licence to occupy. The usual requirement of exclusive occupation would be too easy for tax avoidance. So occupation by the college to any extent will be sufficient to disqualify the scheme from the exemption.

The college and the company both, to some degree, have a presence on the land. The land is the building that contains the library. The college, through its members, goes to the library to make use of its services. The company, through the librarian and other members of the staff seconded to it by the college, provides the services that are available there. The lease gives the company the exclusive right to occupy the land, and the college sold all its books and other library assets to the company. The company entered into a back-to-back agreement to provide those books on hire to the college or other persons or authorities nominated by it, along with other incidental services. The arrangements that it entered into between the company and the college for the use of the library must be seen as a whole. The question which they give rise to is this. Was there a sufficient element of control by the college over access to and use of the land to show that, to some degree at least, the college was in occupation of it?

As Lord Russell of Killowen observed in Westminster City Council v Southern Railway Co [1936] AC 511, 529, in every case where there may be a rival occupancy in some person who to some extent may be thought to have occupancy rights over the premises, the question is one of fact. The issue there was whether the railway company or the various companies to whom they were let out were in rateable occupation of bookstalls and other tenements within the area of a railway station. Here too the question is essentially one of fact, once the right test has been identified. And, in contrast to the rating cases, exclusive occupation is not required. Mr Pleming, very properly, did not seek to rely on the decision of the tribunal on the facts, although it was in the Commissioners' favour. This was because the tribunal may have been unduly influenced by its view that the scheme was an abuse. The Court of Appeal also held that its reasons were unsatisfactory, so it formed its own judgment on the issue. I would be reluctant to interfere with that decision as our function is to deal with issues of law, not issues of fact. But, like Lord Hoffmann, I agree with it.

The Commissioners submit that, if control is an element of "occupation" for the purposes of para 3A(7), a sufficient degree of control was retained by the college by means of the individual members of the college who use the library for study or research and by its librarian and other members of the library staff who run the library. But, as Chadwick LJ pointed out in para 37, the members of the college have no control over access to and use of the library by others. The library is under the day-to-day control of the librarian and her staff, and admission of others is at her discretion and under her control. The college bursar described how the system works in practice in his witness statement. Only persons authorised by her can use the proximity cards that open the doors of the library during staff hours. She can add or remove names from the library's database. Users who are in breach of the rules of the library may be removed by the library staff, and their authorisation to use it may be withdrawn by the librarian. Members of the college who are present in the library every day have no control over these arrangements.

The contractual position between the college and the company as to the librarian and her staff provides the answer to the question whether the college is in control of these arrangements. Under the secondment agreement the library staff were retained in the employment of the college. This was to maintain their existing employment status, including their membership of the pension scheme. But, as the bursar explained, they are for all practical purposes under the control and direction of the company. The contractual change which this brought about was described in a letter which the college wrote to the librarian when, on the date when the various agreements were entered into, she was invited to accept secondment to the company. She was told that she would resume her duties as librarian for the college on the termination of the secondment, but that during the secondment she was to act as librarian for the company.

The effect of this arrangement was that during the period of the secondment her duties as librarian were to be carried out under the direction of the board of directors of the company. She was to be answerable to the company, and not the college, for the way she controlled access to the library. The Commissioners say that the college retained ultimate control because the librarian and the staff are their employees and because the books were hired back to the college. But access to the books is controlled by the librarian, and the secondment agreement places the day-to-day control over her activities and those of her staff in the hands of the company. The fact that the company is controlled by the college does not permit one to ignore the effect of this agreement. The college and the company are separate entities. I would give all the weight that is due to this concept, which lies at the heart of the entire arrangement. In my opinion the college is not to any degree in occupation of the library.

LORD WALKER OF GESTINGTHORPE

My Lords,

I have the misfortune to differ from the majority of your Lordships as to how this appeal should be disposed of. In view of recent developments in the Court of Justice of the European Communities (see Halifax Plc v Customs & Excise Commissioners (Case C-255/02) [2006] STC 919) the general importance of this appeal has been greatly diminished. It may now be of importance only to the parties. It is not therefore appropriate for me to express my dissent at any length. I will set out my reasons as briefly as possible.

The appeal turns on the correct construction, in its statutory context, of the expression "in occupation of [land and premises]", and its application to the facts of the case (which are not in dispute). That expression has no precise or inflexible meaning and it is used in many different statutory contexts, including rating, tax, occupier's liability for dangerous premises, and the protection of the rights of tenants and mortgagors. It is in general taken to import an element of physical presence and some element of control over the presence of others. But these generalities are strongly influenced by the statutory context and purpose.

The relevant context in this case is occupation of land and premises for particular business purposes (that is "eligible purposes" within VATA 1994 Schedule 10, para 3A(7) and (9)). The identifying feature of eligible business purposes is that they do not attract exemption from output tax. Exemption is, in this particular context, not a target but something to be avoided, as is more fully explained in the opinion of my noble and learned friend Lord Hoffmann. What Newnham College aimed to avoid, in its skilfully-prepared and carefully-executed plan, was that the College should be in occupation of its new library for its exempt educational purposes.

I would accept, as do the rest of your Lordships, that the meaning of Schedule 10 to VATA 1994 (dealing with the election to waive exemption on a grant of land, or of rights over land) is necessarily connected with, and informed by, the provisions of Schedule 9, Group 1 (general exemption for grants of land, or of rights over land). The jurisprudence of the Court of Justice deals with cases on the borderline between what should be regarded

"as the occupation of the immovable property or as the supply of services for which the property is an incidental, albeit essential, prerequisite."

The language is that of Advocate General Jacobs in Swedish State v Stockholm Lindopark AB (Case C-150/99) [2001] STC 103, para 31, a case about a commercially-run golf course. But the distinction becomes much more elusive and problematical, I think, in a case like this, in which the taxpayer has chosen to carve out of the built environment of the College (a composite entity used for the many different activities which contribute to residential tertiary education) a part used for a single activity (selecting and reading books and other written research materials). The plan which the College adopted was artificial, regardless of its admitted intention of avoiding tax, because it tried to dissect out one important constituent part of its functional land and premises—the library, of which the College is justly proud—and to separate its occupation from that of the rest of the College buildings.

The artificiality is important because when it comes to applying the expression "in occupation of" to a particular set of facts, its meaning is also strongly influenced by the nature of the premises in question. Acts which amount to occupation of a stretch of entirely undeveloped land (perhaps a protected site of special scientific interest as in Southern Water Authority v Nature Conservancy Council [1992] 1 WLR 775) are obviously of a different quality from those which amount to occupation of an inner-city flat. Moreover some premises are designed for particular specialised purposes (unmanned bank premises were mentioned in argument, to which one might add unmanned launderettes and indeed unmanned public lavatories). Such premises may be physically occupied, to all outward appearances, only by the customers or members of the public, and the element of control may be correspondingly tenuous.

The College's plan was a step which no academic institution—especially one as illustrious as Newnham—would take lightly, and the evidence indicates that the arrangements were such as to secure (reassuringly, no doubt, for the College's Governing Body) that in practice everything would continue as before. Undergraduate and graduate students (and from time to time, no doubt, fellows) would continue to use the library as before, under the supervision of library staff chosen and employed by the College, as before, though the library staff were seconded to Newnham College Library Company Limited ("the Company"); the library was still under the control of the Governing Body, as before, although that control was formally exercised through the College's controlling shareholding in the Company, and its control, by three very senior members of the College, of the Company's board of directors.

That is to my mind the fatal difficulty in the College's case. It is a body incorporated by Royal Charter, and its corporators include some junior, as well as senior members of the College. Students who are not corporators are still in a real sense members of the College: see Oakes v Sidney Sussex College, Cambridge [1988] 1 WLR 431, 440. Students who use the library do so as members of the College. They are no doubt also contractual licensees of a sort, but "customers" would not be an appropriate term, any more than it would be in relation to members of the Athenaeum or the Garrick when they are enjoying the facilities of those members' clubs (the golfers at the Stockholm Lindopark, by contrast, were customers). In my view the College occupied the new library immediately before the lease was granted on 4 March 2004, and it continued to occupy it by the continuing physical presence in the library, during its long opening hours (7 am to 1 am) of a fluctuating population of its senior and junior members and staff. The staff (the visible means by which control was exercised over persons using the library) continued to be employed by the College, although they were seconded to the Company. That secondment may have meant that they acted on behalf of the Company (I am less clear about that than my noble and learned friend Lord Hoffmann) but in any event it did not stop them acting on behalf of the College also.

That is not to say that the Company, or the lease and the contractual arrangements which the College made with it, were shams, or that the Company's separate juristic personality is to be disregarded. The Company is a separate legal person, and the lease and contractual arrangements created real legal obligations. It appears from the evidence that those obligations have been meticulously observed, with no corners cut. But (bearing in mind para 3A(13) of Schedule 10) I do not see that as excluding continuing control by the College. In the field of educational charities the Court has been inclined to minimise the distinction between a body incorporated for charitable purposes and a company whose share capital is held on charitable trusts: see Girls' Public Day School Trust Ltd v Ereaut [1931] AC 12, Re Girls' Public Day School Trust Ltd [1951] Ch 400 (where the preference shares were held on non-charitable trusts) and Abbey Malvern Wells Ltd v Ministry of Local Government and Planning [1951] Ch 728, especially the observations of Danckwerts J at p738-739. Those observations are relevant here. The principal, vice-principal and bursar of the College could act as directors of the Company only if they are confident, as no doubt they are confident, that no conflict of interest could ever arise between the College and the Company. The Company is a separate entity, but its interests coincide with those of the College; it is controlled by the College; and the College, through the Company, exercises control over the library.

For these reasons I would, for my part, allow the appeal.

LORD MANCE

My Lords,

I have had the advantage of reading in draft the speeches of my noble and learned friends, Lord Hoffmann and Lord Hope of Craighead, with which I find myself in full agreement. Their reasoning also substantially corresponds with that in the judgment given in the Court of Appeal by Chadwick LJ, with which I also agree.

The starting point is that there is an important distinction between occupation of land and merely using it, and the appeal turns upon whether the College as well as the library company can be said to have been in possession of the library. I agree with Lord Hoffmann and Lord Hope that it has not been shown to be.

I have considered, but am not persuaded by, the contrary views advanced in the opinions prepared by my noble and learned friends, Lord Walker of Gestingthorpe and Lord Neuberger of Abbotsbury. The Commissioners' primary case before your Lordships' House was that the College was in occupation of the library through its fellows, students and staff using the library and through the College's employment of the library staff seconded to the library company. Before the Court of Appeal it was also argued that, by virtue of its share ownership and membership of the Board of the library company, the College had absolute control over the library company and "thus …. occupies the library through the very fact of [the library company's] presence". This alternative argument was not renewed before your Lordships. Instead it was simply argued that, if and so far as a degree of control was necessary for occupation, the College had such control through (a) the termly meetings between its executive committee and the library users' group, (b) the incurring of expenditure on books performed by the seconded librarian in consultation with the College's director of studies and (c) the running of the library by staff employed by the College and seconded to the library company.

I am unable to accept the argument that the identity of the interests of the College and the library company and their respective staffs should in these circumstances be treated as sufficient to justify treating the College as in possession of the library. I am equally unable to accept the more detailed and fact-intensive argument that a combination of factors, all essentially related to the closeness of the relationship and cooperation between the College and the library company, mean that the former should be treated as sharing possession with the College. As Lord Walker observes, all the indications are that the terms of the agreements between the College and library company were meticulously observed.

Under those terms, the library was leased to the library company and was occupied and administered by the library company through the seconded staff, while the library company provided services to the College. The services included the provision on hire to the College "upon the terms and conditions from time to time in force" of the library books which were sold by the College to the library company. The reference to "terms and conditions from time to time in force" must be to the terms and conditions, including those for use of the library, set from time to time and administered by the librarian on behalf of the library company. I do not see the agreement for "hire" of the books (a term which appears itself to have been used with a tax advantage in mind, which may or may not be achieved) as amounting to more in reality than an agreement to make the books available under ordinary library conditions, set by the library company.

The library company's separate agreement to "manage" the College's rare books also appears to me of no real assistance on the question whether the College was in possession of the library. This is so even apart from the fact that the rare books were kept in the Katharine Stephen Room, which was not, it appears, part of the library leased to the library company, since the agreement for their management contains express permission by the College to the library company "to have such access to the Katharine Stephen Room as is necessary to fulfil its obligations" to manage the rare books in that room.

For all the reasons contained in the speeches of Lord Hoffmann and Lord Hope, together with these short supplementary reasons, I too would dismiss this appeal.

LORD NEUBERGER OF ABBOTSBURY

My Lords,

I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann, and I gratefully adopt his description of the relevant legal and factual background.

As he explains, there are two issues which divide the parties on this appeal. The first issue is one of statutory interpretation, namely the meaning of the expression "in occupation of the land" in para 3A (7) of schedule 10 to the 1994 Act. The second issue, which turns on the facts of this case, is whether the college has, since the completion of the lease, been "in occupation of" the library for the purposes of para 3A (7).

As to the first issue, I agree with all your Lordships that, for the reasons given by Lord Hoffmann, the words "in occupation of the land" should be interpreted in accordance with the principles laid down by the European Court of Justice and the majority of this House in the Sinclair Collis case, [2003] STC 898 [2001] STC 989. "Occupation" can have a variety of different meanings, some of which can vary quite subtly from others, and its precise meaning in any case is thus particularly prone to be governed by its context. This reinforces what appears to me to be a sound prima facie view, namely that the draftsman of para 3A(7), and indeed of various other paragraphs in schedule 10, intended that "occupy", and derivative nouns verbs and adjectives, should have a consistent meaning when used in connection with the "land exemption" from VAT, the issue with which this case and a number of other cases, such as the Sinclair Collis case, have been concerned.

More particularly, the word "occupy" and its derivatives should be given a consistent meaning throughout schedule 10. Paras 5(1) and (5) both refer to the granting of "an interest in, right over or licence to occupy". That is precisely the expression used in Item No 1 of "Group 1 - Land" in part 2 of schedule 9, which was under consideration in the Sinclair Collis case. Further, the draftsman used the word "occupation" in para 5(1) - and "occupying" in para 5(5) - and it is unlikely that "occupation" - or "occupying" - and "occupy" were intended to convey different concepts in the same sub-paragraph. If "occupation" has a particular meaning in para 5(1), it is unlikely to have a different meaning in para 3A(7). This conclusion is also supported by the contrast between "occupation" and "use" in para 5(1), and in other paragraphs of schedule 10.

I turn to the second issue, namely whether the college is indeed "in occupation of" the library. I find the resolution of that issue is difficult, and this is probably attributable to three factors. The first is the artificiality of the arrangements entered into between the college and the company. There can be no question but that the unusual nature of these arrangements arises because they were constructed and drafted (perfectly properly) with a view to achieving a substantial tax benefit for the college. Their almost palpable artificiality makes it hard to work out their practical and legal consequences. Secondly, as Lord Hoffmann points out, your Lordships must proceed on the basis that the principle laid down by the European Court in the Halifax case does not apply, although, at least on the face of it, as Mr David Milne QC for the college engagingly accepted, the Commissioners would appear to have a very strong case for applying that principle in the present case. Thirdly, (presumably because this is the point of principal concern to them) the Commissioners' argument concentrated on the first issue, namely the meaning of "in occupation of the land", rather than on what appears to me to be the much more difficult issue, namely whether the college is "in occupation of" the library.

When considering that issue, assistance can be found in what was said by Lord Scott of Foscote in para 73 in the Sinclair Collis case about occupation for present purposes:

"So what are the characteristics that distinguish a licence to occupy from a mere licence to use? There are, in my opinion, two characteristics, one or other of which must, in some sufficient degree, be present. One is possession. The other is control. If neither is present, I find it difficult to understand how the licensee could be said to "occupy".

There are two further points to be made before turning to the facts of this case. The first is that, as is clear from para 3A (13), occupation in the present context need not be exclusive. Indeed, that is implicit in what Lord Scott of Foscote said in para 79 in the Sinclair Collis case:

"[I]t seems to me unnatural to treat the room in which the vending machine is installed as being partly occupied by the owner and partly occupied by the company. In common sense and commercial terms the owner remains in occupation of the whole of the room".

Secondly, as the European Court said in its judgment in the Sinclair Collis case at para 26, "[r]egard must be had to all the circumstances in which the transaction in question takes place in order to identify its characteristic features."

In this case, there can be no doubt but that the company is "in occupation of" the library. It has a lease of the library; it has purchased most of the books in the library, albeit that it has hired them back to the college. The library is staffed by people who, though employed by the college, are seconded to the company. Access to the library is controlled by one of those people, namely the librarian.

However, that is not necessarily the end of the matter. As already mentioned, more than one person can be in "occupation of" the library for the purposes of para 3A (7). I readily accept that it would be very unusual for a landlord to be occupying the demised property with (or indeed instead of) its tenant. However, as I have said, the arrangements between the college and the company are highly artificial, and, at least in the landlord and tenant context, very unusual. Artificial though they are, one must interpret them according to ordinary principles - that is, by reference to the words the parties have used in the documentation governing their relationship, and the position on the ground.

So, is the college "in occupation of the land" together with the company, or is the company in sole "occupation of the land"? In order to resolve that question, it is important to bear in mind the nature of the land with which this appeal is concerned, as well as the nature of the two entities involved. The land is, of course, the library of the college. The college is a well known and distinguished academic institution, concerned with research and higher education. It is incorporated by Royal Charter, and all of its graduates and undergraduates (as well as fellows) are members of it in a real sense, as my noble and learned friend Lord Walker of Gestingthorpe (whose speech I have had the advantage of reading in draft) explains. As he also says, the company is in practice controlled by the governing body of the college.

So I turn to the question of who is in possession and control of the library. As to possession, the principal physical components of the library are, as I see it, the users, the staff and the books. There is an ancillary component, namely the furniture and other equipment. With the exception of certain valuable rare books ("the Rare Books", which have been retained by the college and are kept in a separate room not forming part of the library), all the books in the library ("the Books") have been sold by the college to the company and leased back to the college. The other chattels in the library (tables, chairs, shelving, microfiche readers, computers, printer, photocopier etc) have been sold to the company. The library is staffed by the college's employees, albeit that they are seconded to the company. The library is used (almost exclusively) by fellows and graduate and undergraduate members of the college.

So far as control is concerned, the position is as follows. Access to the library is controlled by the college, as well as by the librarian who is employed by the college, but seconded to the company. The day-to-day running of the library is in the hands of the librarian and other staff who are employed by the college and seconded to the company. The running of the library is overseen by a group which has representatives of the company and of the college.

Because of the fact-sensitive nature of the enquiry required by the question, and because of the unusual nature of the arrangements, I think it is necessary to consider these aspects of possession and control in a little more detail.

The centrally important feature of any library is of course, the books (albeit in future generations electronic records and publications may come to predominate). They are the sine qua non or the raison d'etre of a library. There is simply no comparison between the importance of books in a library and the importance of a cigarette vending machine in a club, which is what was being considered in the Sinclair Collis case. To put the point another way, not merely do the books take up a significant proportion of the space in the library, but the whole of the library, and all the people in the library, are effectively present because of the books, whether for the purpose of maintaining, reading, copying, cataloguing or borrowing them.

Two agreements were entered into between the college and the company relating to the Books. In my view, they result not merely in the college and its nominees having the use of the Books: the Books are actually in the possession of the college. By the first of the agreements, the Books were sold by the college to the company. By the second agreement, "the company agrees to supply to the college the Services in connection with the [library]", and "the Services" are defined in para 1 of Schedule 1 as including:

"The provision of the Books on hire to the College for the use of the Fellows, undergraduates, graduate students and staff of the College or such other persons or authorities nominated by the College upon the terms and conditions from time to time in force".

In my opinion, that paragraph makes it clear that the Books are "on hire" to the college, i.e. that they are rented to the college, and that the purpose of the hiring is that the Books are to be "use[d]" by people who are all selected by the college, either as "fellows, undergraduates, graduate students and staff" or because they are "nominated" by the college. Thus, the Books are in the possession of the college, and it is the college which selects the persons who can use them. Another agreement was also entered into which requires the company to "manage" the Rare Books, which remain the property of the college, but they are not in the library.

As to the library staff, their position is rather unusual. They remain employed by the college but are seconded to the company. Clause 5.1 of the secondment agreement between the college and the company provides:

"Unless otherwise agreed the college will second the [current library staff] to the company on the terms and conditions under which they are from time to time employed by the college…. The college will notify the company of any changes to the terms and conditions of employment of the [staff]".

The terms of employment require each employee to "act as [librarian, assistant librarian or library assistant as the case may be] for the company and be responsible with other members of staff for the provision of library services to members of the college". Thus, although the members of the library staff, when carrying out their functions, are acting, at least in part, on behalf of the company, they remain employees of the college and are obliged to provide library services to college members. It is the college which is responsible for their terms of service, their discipline, and their dismissal, and for the selection and employment of new staff members (who would then be seconded to the company). It is the college and its members whose requirements they are to satisfy.

As to the users of the library, they are almost all selected by the college, when they became fellows, graduates or undergraduates at the college. (However, as para 1 of the schedule to the second agreement relating to the Books makes clear, the college can authorise others to use the Books, and therefore, by implication, the library). The presence in the library of members of the college is, in the present connection, of an entirely different order from, say, the presence in a bank of its customers, an example raised during argument. Analogies can be dangerous, but Lord Walker's example of the presence of members in the premises of a members' club is, to my mind, much closer to the present case.

So much for possession; what about control? The evidence establishes that access to the library for members of the college is controlled in part by the college and in part by the librarian. The college issues its fellows, graduates and undergraduates and some of its employees with cards which enable access to be obtained to the library (and indeed to other parts of the college). Access to the library is limited to the hours of 7.00 am and 12.45 am seven days a week. However, the librarian, who is of course employed by the college and seconded to the company, can effectively override the use of a card by a person who is in breach of the rules. But it seems clear that she cannot revoke the use of a card without good reason, not least because of her duty to "be responsible…for the provision of library services to members of the college" The library is also open to the public for reference purpose during seven hours each weekday, but a member of the public needs the consent of the librarian to have access to the books. (Presumably, the terms of schedule 1 of the second of the agreements relating to the Books means that she could not deny access to someone nominated by the college, but that is a footnote point at best).

The day-to-day running of the library is in the hands of the library staff, especially the librarian, and they are, as mentioned, employed by the college, but seconded to the company. Three times a year there is a meeting between the executive committee of the company and the library users' committee of the college. The meeting considers reports on the running of the library and the library's finances. The meeting also considers the position of those who have breached library rules, although the ultimate decision in such cases lies with the librarian.

In my judgment, when one looks at the nature and use of this property, the college library, the ownership and use of the essential items in it, namely books, the individuals who actually use the books (whether by reading them in situ or borrowing them and returning them), the parties who control the people who can use the library and the times and occasions they can use it, and the parties to whom the library staff are answerable, and when one bears in mind that the college effectively controls the company, the sensible conclusion is that the college has a substantial degree of possession and control over the library.

This is an exceptional case, where the unusual and artificial arrangements mean, at least in my opinion, that it is simply not right to resolve the issue under para 3A(7) by reference to the prima facie position. Normally, I accept, it would be enough to dispose of the Commissioners' case to say that the owner of the library had leased it to a limited company, that the owner's library employees were all seconded to the company, and that one of those employees had the ultimate control over who used the library. However, on the documentation and facts of the present case, such a broad approach is inappropriate: it is necessary to embark on a more detailed analysis of the contractual documentation, the position on the ground, the users of the library, the identity of the owner and the relationship between owner and company. Once one carries out that exercise, it is apparent, at least in my opinion, that the company does not have exclusive possession and control of the library: it effectively shares possession and control, and therefore occupation, with the college.

For these reasons, in agreement with Lord Walker, I am of the view that the college is "in occupation of" the library within the meaning of para 3A(7) of schedule 10 to the 1994 Act, as a result of the arrangements it has entered into with the company, and accordingly I would have allowed the Commissioners' appeal.